InfuSystem Holdings Inc (INFU) 2012 Q3 法說會逐字稿

Welcome to the Q3 earnings call conference call. My name is John and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to CFO Jonathan Foster. You may begin, Jonathan.

Thank you, John. Good morning, everyone, and welcome to InfuSystem Holdings' third-quarter 2012 conference call. This is Jonathan Foster, Chief Financial Officer. With me on the call today is Mr. Dilip Singh, our interim Chief Executive Officer.

First of all, let me get some administrative matters out of the way. The Company issued a press release yesterday evening. The release is available on most financial websites. Additionally, a Web replay will be available on the Company's website for 30 days.

Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those predicted by such forward-looking statements. These risks and uncertainties include general economic conditions, as well as other risks detailed from time to time in InfuSystem's publicly filed documents. The Company has no obligation to update the forward-looking information contained in this conference call.

While discussing our performance, we will refer to certain non-GAAP measures such as EBITDA, which is not considered a measure of financial performance under generally accepted accounting principles.

With that, I would like to turn the call over to Mr. Dilip Singh.

Thank you, Jon. Good morning, everyone. Third-quarter results again validate the appropriateness of our strategy to focus on improving performance in core areas of our business, while further integrating and realizing business synergies. In this regard, the Company's return to profitability in the third quarter is an important milestone, but it is not the only one.

In less than two full quarters since assuming control of the Company, the current leadership team has accumulated annualized cost savings of approximately $1.5 million. This is an increase of $500,000 from what we reported in Q2.

At the same time, we have achieved significant progress in reducing our debt position from $30.1 million as of March 31 to $24.6 million on September 30. Jon will address this in more detail in a few moments, but I do wish to emphasize that this significant decrease reflects our continuing focus on managing expenses, driving cash flow, and centering our balance sheet.

Revenue of $14.2 million not only demonstrates strong performance but also represents underlying growth. While this was a 2% down compared with comparable 2011 period, please note that last year's performance was significantly enhanced by an opportunistic $1.3 million sale, which Jon will discuss further in his financial analysis. Our top line in the first nine months of 2012 was $42.6 million, a 5% improvement over the same period in 2011.

Operationally, the Company continues to build strength and momentum in both rental and sales. We continue to be adding payors, providers, and partners, and we continue to be supplier of choice in our markets. Our management team and employees together have embraced efforts to focus, prioritize, execute, and sustain this growth.

Feedback from our customers continues to be positive. They appreciate our commitment to further enhancing customer service solutions that make their jobs easier by delivering, for example, on user-friendly enabling technology solutions. As mentioned in our release, excluding fees associated with Concerned Stockholder Group, settlement agreement, Fifth Amendment, and the strategic alternatives, EBITDA for the first nine months of 2012 would have been $11 million, up from $8.8 million in 2011.

During the third quarter, the Company's board of directors continued to explore and evaluate potential strategic alternatives, as we first disclosed in first quarter 2012, and started by prior management. These alternatives include a potential sale or other transaction, including a possible refinancing of Company's debt. We incurred costs of $500,000 related to these activities.

In conclusion, we are encouraged by our continued progress and the opportunities available to us in our core markets. Our goal remains the same -- grow topline revenues, continue seeking operational efficiencies, improve EBITDA, and deliver profits.

With that, I will now turn the call over to Jonathan Foster who will discuss our financial results in more detail, and then we will open the call to your questions. Thank you.

Thank you, Dilip. Total revenues for the quarter ended September 30, 2012 were $14.2 million compared to $14.6 million in the third quarter of 2011, which resulted in a 2% decrease compared to the similar period in the prior year. This decrease was primarily a result of, as Dilip mentioned, an opportunistic pump sale of $1.3 million in the prior year to a few customers. Excluding this item, our revenue for the quarter would have increased by 7%.

For the nine months ended September 30, 2012, revenues were $42.6 million, up from $40.6 million in the 2011 period. This was a 5% improvement for the year-to-date period, which was primarily related to the addition of new customers with larger patient basis, increased penetration into our existing customer accounts, and the mitigation by our customers of the oncology drug shortage affecting certain products.

Excluding the opportunistic pump sales in the third quarter of 2011, would've resulted in a year-to-date revenue increase of 8% compared to $39.3 million in the prior year.

Just looking at rental revenue, it was up over 2011 almost 10% quarter-over-quarter and year-to-date, demonstrating the organic growth opportunities for InfuSystem in this segment.

The gross profit for the three months ended September 30, 2012 was $10.2 million, up 10% from $9.2 million in the third quarter of last year. Gross profit for the nine months of 2012 was $30.9 million, an increase of 13% compared to $27.3 million for the first nine months of 2011.

Gross margin percentage for the third quarter and year-to-date in 2012 was 72% and 73% respectively. This compared to the third quarter in 2011 of 64% and 67% year-to-date, as of September 30, 2011. This increase is due to two reasons. The first is pump depreciation is gradually decreasing, as our actual pump lives in our rental fleet are averaging longer than the five-year depreciable life we use. The second is that we had a higher mix of rentals compared to sales, and rentals have a higher margin than sales and service.

Turning to selling, general, and administrative expenses, SG&A for the third quarter of fiscal 2012 was $9.3 million, significantly lower than the prior period's $31.7 million. For the nine months ended September 2012, SG&A was $30.5 million compared with $92.9 million for the same period last year.

Prior year's numbers contained a charge for asset impairment of $23.4 million and $67.6 million, respectively. Excluding non-cash impairment charges, SG&A increased $1 million for the quarter and $5.1 million for the nine months ended.

For the quarter we incurred $900,000 related to certain events and processes. These costs included $500,000 pertaining to an intensive study initiated by prior management to explore and evaluate potential strategic alternatives, which Dilip noted earlier, included a potential sale or other transaction including a possible refinancing of the Company's debt.

It also included about $500,000 due to the increased interest expense, the results of the monthly ticking fee that was implemented on August 1 under the Fifth Amendment of our credit facility. And we had a $100,000 reduction in expenses associated with the Concerned Stockholder Group.

For the nine months ended September 30, 2012, the costs associated with the Concerned Shareholder Group are now complete. The increase in SG&A related primarily to $2.2 million in legal expenses, $1 million in severance costs, and $600,000 in retention payments to key employees. This was all net of the $1.4 million of reversal of stock compensation expense and $500,000 in expenses related to strategic alternatives.

Outside of these charges, SG&A experienced an increase, primarily compared to the prior periods, in selling, compensation and travel costs, and an increase in our finance and accounting steps. The third-quarter net income was approximately $100,000 equal to a de minimis income per basic and diluted share, compared to a $16.6 million net loss equal to $0.79 loss per diluted share in the prior period.

For the nine months ended September 30, 2012, the Company's net loss was $1.7 million or $0.08 per diluted share, versus a net loss of $44.7 million or $2.12 per diluted share for the year-ago period. One-time net expenses discussed above related to the Concerned Shareholder Group, settlement agreement, Fifth Amendment and strategic alternatives of $500,000; and $4 million for the three months and nine months respectively ended September 30, 2012, respectively, hampered these results.

EBITDA for the third quarter of fiscal 2012 was $2.9 million compared with $3.2 million a year ago, excluding the mentioned asset impairment charges. For the nine months ended September 30, 2012, EBITDA was $6.1 million compared with $8.8 million for the same period in 2011, excluding the asset impairment charges of 2011.

Excluding the fees associated with the settlement agreement, Fifth Amendment costs and strategic alternatives, EBITDA for 2012 would have been $3.4 million for the quarter and $11 million year-to-date. We use EBITDA as a means to measure the Company's operating performance. We have a full reconciliation of EBITDA and non-GAAP measure to net income or loss in our press release issued yesterday evening. The Company defines EBITDA as earnings before interest, taxes, depreciation, and amortization.

Now to the cash flow statement. Net cash provided by operations for three months ended September 30, 2012 was $4.6 million compared to roughly $800,000 in the prior-year period. The latest quarter's results reflected increased professional fees associated with strategic alternatives and an increase in interest expense as a result of the ticking fee. In addition, the Company reported capitalist expenditures of $1.5 million, an increase of roughly $600,000 compared to the prior-year period.

With regard to liquidity and debt, the Company had available approximately $3.4 million on its $5 million revolving credit facility. During the quarter, the Company reduced its draw under this credit facility by $400,000, in addition to the normal quarterly payment on its $20.6 million term debt.

As a result of our Fifth Amendment that was entered into the second quarter of 2012, we reclassified during this quarter all our previous long-term debt pertaining to our credit facility to short-term debt, a total of $20.6 million based on the new maturity date of July 1, 2012 -- I mean 2013.

The Company ended the quarter with $1.5 million of cash compared to $800,000 in the previous quarter of 2012. We intend to refinance our indebtedness prior to maturity in order for us to maintain sufficient funds for our operations and alleviate the burden of additional costs generated by the settlement agreement and the Fifth Amendment.

We ended the quarter with accounts receivable days outstanding or DSO of 48 days, which decreased slightly from this time last year's 50 days due to improved paperwork flow. Our days sales and inventory or DSI increased to 24 days. Days sales and accounts payable increased to 31 days, mainly due to the expenses related to the settlement agreement, but also due to better cash management. Total working capital days decreased from 48 days to 42 days.

In summary, as Dilip stated earlier, this quarter was one that we are proud of getting back to profitability by strengthening the balance sheet. That concludes the formal part of the call. We will now open it up to questions.

(Operator Instructions) Joe Munda, Sidoti & Company.

Good morning, guys. Dilip, can you give us a sense of the size of the pump fleet currently?

You are talking about the number of employees?

No, the size of -- how many pumps do you have?

Oh, we can definitely talk about the total amount of pumps.

Yes.

We have roughly 24,000 pumps on the rental side, on one rental side, so roughly about 36,000 total pumps.

So 24,000 rental, 12,000 for sale in inventory?

No, from a standpoint -- I'm talking 36,000 total pumps in our rental fleets.

36,000 in the rental fleet. And what was the breakdown between rentals and sales in the quarter, percentagewise?

Are you talking pumps or revenue?

I am talking revenue. At this point, I'm talking revenue.

Okay, from the standpoint of -- it's right there on our P&L statement, so we had roughly --.

I'm sorry, I didn't -- yes, there you go. You broke it out. Traditionally --.

-- we don't break it out.

Yes, okay.

Yes, we are now breaking that out, so you will see rentals were $13 million compared to almost $12 million a year ago on the three months ended, and then almost $39 million versus $35.5 million last year. So rentals definitely are our higher gross margin --.

Yes, that's my -- leads me to my next question. What is leading to the growth in the rental segment? Are you guys increasing the pump fleet or is there new customers coming in, or higher average sales price -- or rental price? How is that coming about?

So the customer base, Joe, is definitely increasing. And we get for growth of the revenue new pumps when we have new customers. Last but not the least is that the volume of the pumps also to larger customers is increasing.

I would just like to mention, we only buy pumps really once customers identify that they are coming on board. So we don't -- on the rental side we don't buy pumps in anticipation of customers. We only buy it once we know they are coming on board.

So of that 36,000 fleet that you have, how many would you say are currently out? All of them, or is it like 35,000 are being used and you guys have a spare of 1000?

You're now getting into an area of proprietary. We really don't discuss the utilization percentage, but here's what I will tell you is that our utilization percentage is drastically up. It's about up 10% from last year. We have made a key focus on increase in our utilization, and that's another reason for increase in our gross margin.

Okay, that's helpful. Then you guys talked about some depreciation coming down due to longer life rather than five years from your pumps. Can you give us some color on that?

Sure, first of all, with our acquisition of FBI, we now have some first-in-class repair and refurbishment capabilities, and so that has definitely helped us extend our lives. When this Company was originally founded, they started with a five-year depreciable life. Right now, the majority of our pump fleet is fully depreciated.

Okay, so what is -- let's say you go out and buy a new pump. What is now the depreciable life on that new pump?

It's still five years. We are looking at and discussing with our auditors about examining our depreciable life and what it should be, but it's definitely greater than five years. But it is something we are looking out from the account inside.

I've heard of new laws where they are going to lower the depreciable life on an item like a pump. Would that benefit you guys or would that be -- I don't know how to look at it.

Well, from a book perspective, really depreciable life should match what it really is. And so I think the original -- when they set the Company up that they expected there to be more obsolescence in the pump technology. But the pump technology really has remained unchanged over the years. So that plus the capabilities at FBI have really extended the lives of our pump.

And when you look at our pumps, the way that FBI -- the way that our service facility from Kansas refurbishes them, you really can't discern the difference between a new pump and an old pump.

Okay, then just one final question. You guys talked about a $0.5 million study from prior management regarding strategic alternatives and I guess other issues with the Company.

Did any results come out of that, or was that just a moot point?

Joe, as we stated earlier, this study of strategic alternative options by Houlihan Lokey got started in the first quarter of this year. The process is continuing. We want to make sure that we go through an exhaustive process. And if there's a change in terms of our initiative, that means when it comes to an end or if there are some concrete results related to it, we will definitely announce it through an 8-K to all of you.

Okay, so you guys also talk about the debt coming due this year -- I'm sorry, maturing in July 2013. Is it safe to say that the Company will be sold before then, or is some type of strategic partnership or alternative is going to come to fruition by then?

Joe, this is Jon. As stated in our [risk] section, we must refinance our debt. That is our top priority and we are working on that. We hope to have something to share in the near future.

Okay, I'm just a little confused why $22 million would go from long-term debt to short-term debt.

Well, that's because of just the accounting rules. Once you are less than a year in your maturity date, it's no longer long-term.

No, no, I understand that. Why you guys want to finance it before that actually occurred.

We are. As we are saying, we are right now -- if we -- any company that would put that in their risk section, we must refinance our debt, you can -- that is the focus of management right now is to finance our debt, refinance our debt.

Okay. Yes, I am just looking at it because you guys are saying strategic alternatives and looking at this thing in less than a year, and that's what I was thinking. But anyway, I appreciate the answer. Thank you.

(Operator Instructions) Michael Potter, Monarch Capital.

Just a couple questions here. To continue on with, I guess, the Houlihan retainer, the $0.5 million -- it's $0.5 million that was paid to Houlihan during the quarter? Is that correct?

Not all of it was Houlihan. It was -- there are some professional fees involved there as well.

Okay. Is this a monthly retainer? Are we going to continue to see this expense going forward?

From a standpoint until we end the strategic alternative exploration, there will be some additional expenses going forward. We don't anticipate them to be too much longer.

Okay, so we're going to continue to see these pretty high fees being paid during the current quarter.

We are doing everything to keep those fees as low as possible, but --.

We are under contract, I'm assuming, so --.

Exactly.

We are fulfilling our contracts, so it's a straight answer.

Right, from a standpoint of the strategic alternatives and our engagement with Houlihan Lokey, there will be some expenses in the fourth quarter.

All right. The retention payment that was made was how much again?

It was roughly $600,000 paid in the first quarter of this year, made to key employees by the prior management.

That was also prior management?

Correct. That was done in February.

Okay, how many employees was that payment made to?

I don't have it off the top of my head. Probably 15 to 20.

15 to 20 employees, okay. Okay, can you -- you mentioned -- I know we talked about on the last conference call with regards to the refinancing. Obviously, this is -- I would say it would be one of the more paramount issues that the Company is facing right now because I think we're paying, what, $100,000 per month ticking fee?

It's 1% per month.

1% per month, okay. You anticipate having that -- being in a new agreement in the near term, I'm assuming. Is that before the end of the year?

You know, Michael, I would prefer it to be tomorrow. So we are working as hard as we can to get that closed, so -- to get something closed there. So like I said, in the near future we hope to be sharing some good news with you.

Okay, just another question. Obviously, it's not on the top of things to do, but we've talked about entering new markets for some time and leveraging our infrastructure and skill set, and perhaps focusing on the pain management or diabetes market. Have we made any further progress there?

As stated earlier, Michael, the trials are still continuing, but the good news is that we are seeing an increase in our services other than colorectal cancer side and other cancer treatment. So the operating model of the Company, which is well established for the last 25 years, is now being embraced by larger clinics and hospitals which are treating multidisciplined cancers. And we are seeing that -- increase in our services and other cancer treatment.

And on the new initiatives, as I said, the trials are moving forward and we anticipate -- I am not going to give you a forward-looking statement here, but the trials are going reasonably well.

Okay. All right, guys, I will get back in queue. Thanks.

(Operator Instructions) [Raj Hirsi], Clay Hill Capital.

Thanks, and congratulations on a great quarter. I am somewhat new to the story in terms of being a shareholder and haven't followed it, but I have gone back and looked over the numbers. And I was just curious, the sales growth, the revenue growth on the rental side if we just look at that first, it seems to have really gone up a lot in Q1 and then sequentially over Q4 almost $1 million. And then it seems to have sort of inched up a little bit.

I was just wondering is that the right way to look at this, or is there seasonality in this business for some reason? If that is the case, then if you could just talk to why that pattern exists, that would be helpful.

Really from a standpoint, I will add color to what I said previously in that one of the main obstacles we had in 2011 was the drug shortage of the drugs that our ambulatory pumps deliver. They are still listed on the official websites as being in a drug shortage, but our customers have done a great job in mitigating that. And so if we have a pump at a customer and they don't have the drug for it to deliver, then we do not have a billing.

So along those lines, that's been mitigated by our customers. But also our operational team delivering great service to our customers and our sales force out there, increasing our customer base with larger facilities which have larger pump fleet requirement, has also added to that increase.

So it has not just been an increase from our existing customer base, but also adding to that customer base.

So is it safe to surmise that most of that increase occurred in Q1 sequentially, and then since then it's been more incremental in nature?

Well, no. We are still adding -- we are very confident for going forward in 2013. We have a very strong new customer pipeline that our sales force is working on, so we feel that on the rental side we have a very strong foundation going into 2013.

Okay. On the product sales side, you mentioned the $1.3 million of opportunistic sales in the last year. Can you just give us a little more color on that? How is that different from the normal sales? Why would it be broken apart? Is there more of that in Q4? Because I guess Q4 of last year also had a somewhat high number of product sales.

Is that sort of something that maybe is pulling from sales this year? If you could just give us some color on what exactly happened there and why you chose to break it out, that would be helpful.

Sure. On our -- out of our facility in Kansas where we do most of our direct sales, they look around for opportunistic opportunities. And examples of that would be a facility that is looking to change out its large volume pump fleet and go with a newer model. So they are looking to sell their existing pump fleet in a one-time sale.

We look at those from time to time, and at that time we identified a large volume of those pumps that we could bring in, refurbish, and flip to buyers. So that occurred in Q3 and Q4 of last year.

We see those opportunities from time to time. This year we really haven't acted on any of those, simply because with our cost of capital, we are trying to manage our inventory from a cash standpoint, so we've bypassed on some of those opportunities this year.

Okay, okay. So I guess there was a little bit of that in Q4 as well, and it's --.

(inaudible) last year, yes.

Right, and this is different from your normal sales in that it's sort of a quick flip, I guess?

Correct. We still have some of those pumps in inventory and it's just a question of how much of those can we quickly find a buyer for, and how many of those do we feel that we will make -- do we need those in inventory going forward? So they are quite different than our normal direct sales process.

Got it. Okay, that's helpful. Then final question, I guess prior management in prior quarters will have had, quote/unquote, nonrecurring items that they chose to highlight. For example in Q3 (technical difficulty) this year they had -- they highlighted some $400,000 of acquisition and due diligence costs. And then in quarters prior to that, they also had sales (technical difficulty) and other costs that they chose to sort of break out.

This is all (technical difficulty) course. But if you make those adjustments and add those back, then it looks like adjusted EBITDA margins, if you will, last year were pretty good, maybe even better than this year's. How much stock should someone place in those representations that were made about, quote/ unquote, nonrecurring costs last year?

Well, since none of us were here, I'm not going to talk about prior management. But when Dilip and I had our first-quart called together, we stated how we were going to look at EBITDA, that we were going to basically look at basic EBITDA. And if something was truly nonrecurring or one-time in nature where it wasn't in a gray area, we would identify it. We've talked about some today. But from a standpoint of ongoing costs like that or unique costs, we view that as going forward in our discussions as just a part of doing business.

Okay, great. Well, thanks a lot, and I hope to hear about a debt refi soon.

Great, thank you so much for the interest.

(Operator Instructions)

Operator, I believe we are out of time today.

Let's take one more call, just take one more call.

One more question?

We have no questions.

Okay, great. In that case, thank you all for participating in the call. We look forward to talking to you individually in the weeks ahead, since we are out of our blackout period. In conclusion, we are encouraged by our continued progress and the opportunities available to us in our core markets. Our goal remains the same -- grow topline revenues, continue seeking operational efficiencies, improve our EBITDA, and deliver profits.

Thank you all for participating in this call and have a nice day. Goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.